Europe’s Middle-Age Trap

by Edoardo CampanellaEdoardo Campanella is currently a Fulbright Scholar at Harvard University's Kennedy School of Government. He has worked as an economic adviser to the Italian Senate and was formerly an economist at the World Trade Organization.06.03.2014

CAMBRIDGE – European policymakers have finally recognized the severity of their youth-marginalization problem. But, just over the horizon, there looms another social catastrophe that they have yet to acknowledge. This time, it is middle-aged workers who are poised to suffer.

This might seem surprising, given that middle-aged workers seem to be the winners in today’s system. Workers in their late forties and early fifties enjoy stable employment, control the political system, and are less vulnerable to economic downturns than their colleagues who are closer to pension age.

Moreover, high entry barriers, seniority-related benefits, and tough restrictions on firing employees have enabled Europe’s middle-aged workers to retain even moribund jobs – a situation that has contributed substantially to youth marginalization. According to the OECD, from 2008 to 2012, unemployment among Europeans aged 45-54 increased from 5.2% to 7.7%, while youth unemployment jumped from 15% to 21.4%. At the end of 2013, approximately four million people aged 50-64 were unemployed, compared to nearly six million aged 18-24.

Such statistics explain why policymakers have so far failed to recognize that there is a problem at all. But middle-aged workers’ enviable conditions will soon begin to erode, as mounting competition from emerging economies and relentless technological progress weaken their grip on the system.

The traditional industries that employ older workers are disappearing rapidly from Europe, and the companies that are replacing them – such as high-tech start-ups – are dominated by workers under 40. The McKinsey Global Institute has identified 12 potentially disruptive innovations – including 3-D printing, advanced robotics, and autonomous vehicles – that will revolutionize the business landscape, creating new opportunities for young minds, while driving older workers from the job market.

In such a dynamic environment, workers can prosper only through continuous skills upgrading, willingness to move, and entrepreneurial resourcefulness. This gives young workers a major advantage. After all, it is far more difficult for middle-aged people to acquire new competencies, uproot themselves for a job (owing to more binding family constraints), or assume the risks associated with starting a business.

Although these trends are prevalent worldwide, Europe will likely be hit particularly hard. Its population is aging faster than, say, America’s, undermining the labor force’s ability to respond to the need for skills upgrading. And Europeans, who are accustomed to a particularly generous worker-protection system, will find it more difficult to adjust their expectations to the flexible, knowledge-based model recommended by the European Commission.

The pro-youth movements that are flourishing across Europe – in both business and politics – will complicate the situation further, as they push for generational renewal in many industries. In Italy, for example, young leaders have emerged in the major political parties, promising to overturn a socioeconomic system that is heavily skewed in favor of older workers and misallocates resources within the economy.

Furthermore, the euro will contribute to the marginalization of middle-aged workers by preventing national governments from using competitive devaluation to preserve declining industries. Likewise, European countries’ massive public debt is limiting policymakers’ ability to protect vulnerable sectors.

But the pain will not be shared evenly across the eurozone. To rebalance their budgets and regain competitiveness, peripheral countries will eliminate thousands of public-sector jobs – the very jobs that middle-aged workers dominate.

Of course, generational renewal, technological progress, and international competition are intrinsic to modern economies. But the accelerating pace of economic transformation means that governments have far less time to implement relevant structural reforms. Making matters worse, eurozone countries lack access to several fiscal or monetary-policy tools that could help to smooth the transition.

As millions of people are pushed into a middle-age trap – too old to work, but too young to retire – the risk of social instability and political polarization will increase. Trade unions, reinvigorated by the despair of marginalized middle-aged workers, will question the system’s fairness. Young people, eager to overcome years of hardship, will defend an economic model that rewards fresh minds and flexible lifestyles. Eventually, these tensions will erode social cohesiveness.

European policymakers should intervene before such an outcome materializes. In order to ensure life-long learning programs for all workers, without putting excessive strain on public budgets, they should promote public-private partnerships. They should also allow wages to decline after a certain age – rather than increase with seniority – to reflect the fast depreciation of professional skills in modern economies and boost older employees’ appeal. Finally, they should rewrite Europe’s social contract, so that it promotes intergenerational solidarity and creates an inclusive system capable of merging young people’s creativity with older people’s wisdom.

Europeans now live longer than anyone else on the planet. The challenge now is to figure out how to prolong their professional lives.

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